California's bid to tax Big Oil

NEW YORK (CNNMoney.com) -- Californians, long the trendsetters in the nation's environmental laws, are voting on a proposition Tuesday that would tax oil companies and use the money to fund renewable energy.

Known as Proposition 87 the law would levy a tax of 1.5 to 6 percent on every barrel of oil pumped in the state, depending on the price of crude.

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The goal is to create a fund of $4 billion over the next 10 years that would be used to fund alternative energy sources and reduce the state's consumption of oil by 25 percent.

"We can't afford to wait for Washington to get their act together," said Yusef Robb, spokesman for Yes On 87. "I don't want to sit around breathing air that is going to shorten my life while sending dollars to the Middle East."

But the law's opponents, financed by the big oil producers in the state including Chevron and a consortium run by Exxon Mobil (Charts) and Royal Dutch Shell (Charts), say it will do little more than create a $4 billion bureaucracy in state government while simultaneously raising fuel prices.

They also say schools and public safety will suffer as the value of oil in the ground, currently assessed under property taxes, will be less due to the tax.

"One thing not suffering for lack of money is alternative energy," said Scott Macdonald, a spokesman for No On 87. "It going to drive up our fuel prices because its a tax on production, not profits."

It's not certain that California's law, if passed, would be followed across the country.

California is the only oil producing state in the nation to not have a production tax, although some other states with one offset it by doing away with a corporate income tax.

Still, the idea of raising taxes on oil producers in some capacity to fund alternative energy may catch on in other states.

"That would be the biggest fear (for investors)," said Neal Dingmann, an energy analyst at Pritchard Capital Partners in Houston.

Dingmann said he wasn't too concerned about the proposal in the short term, but did question the logic of taxing producers, saying it might be more efficient to tax consumers and let the high gasoline prices spur private sector innovation.

"Much like the consumer, the producer is going to gravitate to the highest return on investment as well," he said.

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